Examining the Top 8 Reasons for Personal Loans
Personal loans are a convenient and fast financial solution for emergencies, large purchases, and other expenses. Applying online is easy, and if you’re approved, you may be able to receive the money you need that same day.
Types of personal loans
What kinds of personal loans are available? Let’s explore three common types of personal loans and how they work.
Installment loans are unsecured loans that offer competitive rates and provide you with a lump sum upfront. These loans are repaid over time through set monthly payments, which can make them easy to build into your budget.
An installment loan may also offer the flexibility of refinancing if you find you need to borrow more money or adjust your payments.
Another type of personal loan is a payday loan, which is meant to provide immediate, short-term relief. As such, it can be a good solution for financial emergencies that may occur between paydays.
Payday loans can be an option for those with bad credit or no credit history because approval is based on your income and employment history, not just your credit score.
As the name implies, a payday loan must be repaid in full by your next payday. As long as you know you’ll be able to repay the full amount of the loan, a payday loan can be the answer to an unexpected expense.
Personal lines of credit
If you’re not sure how much you need to borrow, consider a line of credit. This type of personal loan functions much like a credit card by allowing you to borrow up to a predetermined limit. It’s a form of revolving credit, which means you have the flexibility to borrow and repay smaller amounts of money as you need to, rather than borrowing the entire limit amount at one time.
A line of credit can give you the security of knowing you can immediately access funds to cover upcoming expenses or unforeseen emergencies.
The best part? You only pay interest on the money you actually borrow. Once you repay what you’ve borrowed, you have the rest of the line of credit available for the next expense that arises.
Most common reasons for personal loans
So, why do people take out personal loans? Borrowers typically get a personal loan for:
1. Emergency expenses
One of the most common reasons for applying for a personal loan is to cover unexpected emergency expenses. These are unplanned financial emergencies such as:
- Medical bills
- Car repairs
- Home repairs
Personal loans allow you to obtain the funds to address urgent financial emergencies that strike without warning. Knowing you can pay for a replacement water heater when your old one fails, for example, can give you a sense of security and relieve some stress.
2. Debt consolidation
Instead of making payments and paying interest on multiple separate loans, debt consolidation allows you to combine all your loan amounts into one (consolidated) loan.
For example, rather than having separate loans for furniture, appliances, and medical bills, you can use a personal loan to pay off the individual loans and then make monthly payments to the personal loan lender.
Depending on the loan terms and interest rate, a personal loan for debt consolidation can even be a way to pay off multiple debts faster than if you paid them as separate loans.
3. Unexpected bills or financial gaps
Personal loans can bridge financial gaps between paychecks. Even if you’re great at budgeting, the occasional hiccup can temporarily throw things off course.
When money’s tight, getting a personal loan can help you avoid late fees or penalties, which is especially important if you’re taking steps to build or repair your credit. Having a plan for dealing with the unexpected gives you peace of mind and gets you back on track with your financial goals.
4. Home improvements or repairs
Another popular reason to get a personal loan is to pay for home improvements or repairs. Being proactive about home maintenance keeps things from developing into emergencies that cause added expenses. Home updates and improvement projects increase the value of your home as well as your quality of life.
For example, you can use personal loans to pay for:
- Repairs to your home’s structure or systems.
- Upgrades to replace outdated fixtures, appliances, flooring, or windows.
- A home remodeling project to make your dream home a reality.
Using a personal loan for home renovations and upgrades could even pay off in the future by increasing your home’s resale value.
5. Education or training expenses
It’s a fact: higher education is expensive! But it’s also an investment in your career and future earning potential. Personal loans are an excellent source of funds to support your educational pursuits or training for career advancement.
You can use a personal loan to pay for a variety of education costs, including:
- Tuition and fees
- Certification programs
- Professional development
Using a personal loan to fund higher education or professional development training might even open the door to a better-paying career!
6. Purchasing big-ticket items
Personal loans can be a good option when you’re facing a significant expense that isn’t quite as large as a home or car. Even basic luxuries like a flat-screen TV or outdoor grill can cost more than you have in your savings account, but they make a big difference in how you spend time at home with family.
With the right personal loan, you can immediately purchase these items rather than saving up for them. Plus, you can choose a loan that offers a structured repayment schedule and is more manageable for your budget than credit card debt.
Vacations can be expensive. Flights, cruises, tours, vehicle rentals, lodging, food, souvenirs – it all adds up.
With a personal loan, you can take advantage of immediate travel opportunities to go on that dream trip, or alleviate stress associated with emergency travel.
8. Starting a small business
Have you ever dreamed of owning your own business? Depending on your business idea, you may need seed money to kickstart your venture. Getting a personal loan can provide this initial capital.
Personal loans can offer quick access to funds without needing a business credit history. They can be used for various startup costs like:
- Incorporation fees
- Office space, furniture, and supplies
- Product inventory
- Marketing and website costs
As an entrepreneur, the right personal loan is often an investment that helps you get started on growing a successful business.
Alternatives to Personal Loans
Personal loans aren’t the only option to explore for the expenses we’ve discussed. There are alternatives you might consider.
Many people rely on credit cards when they need to tap into some extra funds, but there are drawbacks. Applying for a credit card requires a hard credit inquiry, so it may not be an option if you have poor credit or no credit history.
Home equity loans
If you own your home, you may have home equity, which is the difference between the value of your home and the amount you still owe on your mortgage. Home equity is built in two ways:
- By making payments on your home mortgage loan each month.
- As your home’s market value increases.
Equity is a financial asset, and you can borrow against it with a home equity loan or a home equity line of credit. A home equity loan will give you a lump sum of money at one time, or function like a regular line of credit where you borrow small amounts of money as needed.
A drawback is that payments for a variable-rate line of credit can go up without warning.
As a homeowner, you might refinance your mortgage to:
- Lower your monthly payments.
- Shorten the term length of your mortgage loan to pay it off faster.
- Get a lower interest rate.
If you need funds for large expenses, you might be able to qualify for a cash-out refinance, allowing you to take out some of the equity you’ve built up.
A 401k is a retirement account that employers offer to their employees. Like equity, it’s a financial asset you can borrow against through a 401k loan. There’s no credit check for this kind of loan, and the interest rate is typically low. As you repay the loan, you build back up your retirement funds.
There are limits on how much you can borrow from your 401k. You should also carefully weigh the pros and cons of borrowing money from your retirement savings.
Life insurance policy loans
Borrowing money against your permanent life insurance policy is an option if your policy has built up enough cash value.
Life insurance policy loans often offer flexible repayment terms. There may even be an option not to repay at all. In those cases, the money you borrowed from the policy will be deducted from the benefits paid upon your death.
Apply for a Personal Loan from Advance America
Whatever your reason for needing extra money, Advance America offers personal loans for borrowers with all types of credit scores. Apply online or at your nearest branch to receive your instant approval decision. If approved, you may even receive your money the same day.
Ready to apply for a personal loan? Start your application now!